The issue of the co-existence of arbitration and exclusive jurisdiction clauses in the same agreement is, on its own, a very interesting legal topic and has triggered the writing of many legal articles on the matter. Moreover, many courts have been faced with the dilemma of “arbitration v litigation” leading to extensive examination of this issue in judicial decisions across various jurisdictions worldwide. The prevailing trend, according to applicable caselaw, is to give priority to arbitration clauses over jurisdiction clauses, unless there exist compelling reasons not to.
The matter was addressed by the Limassol District Court in Civil Action no. 832/23 between CSG v. UC S.R.L., which led to the recent decision dd 2/12/24.
The facts of the case
In a nutshell, two agreements were signed between the opposing parties. The first, being the Service Provision Agreement, dd 21/12/2018, which was entered into between the company CSG (owned by DC) and the company UC S.R.L. (owned by AC). Under this agreement UC S.R.L. was responsible, inter alia, the management and development of the CSG's business. Subsequently, a second agreement, i.e. the Call Option Agreement dated 2/1/2019, was signed between the owners of the aforementioned entities, i.e. DC and AC, respectively. This agreement gave AC the right to purchase 10% of CSG's share capital at a nominal value. The Call Option Agreement incorporated both an arbitration clause and a jurisdiction clause in its body.
The relationship between the two individuals broke down with DC arguing that AC's performance as general manager of the Group was very poor. Consequently, DC/CSG terminated both agreements and sued AC and his company UC S.R.L. seeking, inter alia, declaratory orders that the termination was legal, that UC S.R.L. failed to deliver on their promises and discharge their duties under the agreements, that a breach of fiduciary duties had occurred, etc.
In response, AC invoked the arbitration clause in the Call Option Agreement, seeking to refer part of the dispute to arbitration in order to claim his 10% of the share capital in CSG. AC filed a conditional appearance in court together with an application seeking a stay of the proceedings to the extent concerning only the Call Option Agreement and an order of the court referring that matter to arbitration. If successful, this would result in the Service Provision Agreement remaining before the courts for adjudication, whilst the dispute over the Call Option Agreement would be referred to international arbitration. DC counter-argued (a) that the two agreements are intrinsically linked and that all disputed matters should be examined by one single Judge in the presence of all parties and (b) that the true intention of the parties was for the dispute to be adjudicated by a court, whilst the arbitration clause was only permissive if both sides agreed to arbitrate.
Legal Reasoning
The Court initially considered AC's argument that only the arbitral can rule on its own jurisdiction by virtue of section 16(1) of Law 101/87, and that, therefore, the court was obligated to suspend the judicial proceedings and leave the arbitral tribunal to decide on the issue of jurisdiction.
Article 16(1) reads as follows:
"The arbitral tribunal has jurisdiction to rule on its own jurisdiction and to examine issues related to the existence or validity of the arbitration agreement. For the purposes of this paragraph, the arbitration clause, which forms an integral part of a contract, is considered as a separate agreement from the other terms of the contract. A decision by the arbitral tribunal declaring the contract void from the outset does not automatically render the arbitration clause void."
The Court disagreed with the view of the applicant's lawyers, arguing that in its opinion Article 16(1) does not negate Article 8(1) of the same law, which provides that when a claim is brought concerning a matter that is subject to an arbitration agreement, the Court must refer the dispute to arbitration, unless the agreement is found to beinvalid, inoperative, or incapable of being enforced.
In light of the above, the Court with reference to Alexandrou v. Cosmos Insurance Public Ltd, Civil Appeal no. 34/2013, dated 4/2/2019, went on to examine first the co-existence clauses 11 (arbitration clause) and 12 (jurisdiction clause) in the Call Option Agreement and whether the two are, indeed, conflicting. In doing so, the Court made reference to clause 10.1 of the Agreement which reads as follows:
"Severance: If any clause or part of a clause of this Agreement is found by any court or administrative body of competent jurisdiction to be invalid, unenforceable or illegal, the other provisions of this Agreement shall remain in force”.
and, concluded that the power to determine on the validity (or not) of any clause in the Agreement rests with the court as opposed to an arbitrator or arbitral tribunal.
The Juge further found that clause 10.1 above is in line with clause 12 which gives exclusive jurisdiction to the Cyprus Courts to adjudicate any claim under the Call Option Agreement and also found that that clauses 11 and 12 do not conflict with each other but rather they co-exist harmoniously. In fact, the Court ruled that the true intention of the parties was to resolve any dispute before the Cyprus Courts and that the arbitration clause was merely an alternative dispute resolution mechanism which could be followed only if both parties jointly agreed to refer the dispute to arbitration instead.
The Court supported its aforementioned findings with reference to the case of OOO Abbott a.o. v. Econowall UK Limited a.o. (2016) EWHC 660 (IPEC). In that case, a patent license agreement included both an arbitration clause and a clause granting jurisdiction to the English Courts. The English Court found that the clauses appeared to conflict, but concluded:
“68. In Ace Capital Ltd v. CMS ENERGY Corp.[2008] EWHC 1843 (Comm) … two cases which contained both an exclusive English jurisdiction clause and a mandatory arbitration clause …
…
70. Under the ‘General' umbrella of section 11 of the Licence Agreement there is this term:
“If any clause or any part of any clause in this Agreement is declared invalid or unenforceable by the judgment or decree, by consent or otherwise of a court of competent jurisdiction from whose decisions no appeal is or can be taken all other clauses or parts of clauses in this Agreement shall remain in full force and effect and shall not be affected thereby for the term of this Agreement.”
71. The reference to “a court of competent jurisdiction” appears to mean exactly that, as opposed to an arbitrator. The clause contemplates the possibility that an English court may, following contested litigation before it, rule that a clause of the License Agreement is invalid or unenforceable. This is consistent with the term giving exclusive jurisdiction to English courts but not with the arbitration clause according to the interpretation proposed by Mr Jones.
72. I have come to the conclusion that viewed objectively, the parties' likely intention was that the English courts should have jurisdiction over disputes arising from the License Agreement and that arbitration clause is permissive: the parties may jointly elect to refer any dispute to an arbitrator but no party can insist upon it, at least not once an English court has been seised. I construe the License Agreement in that sense.
73. Although it is not relevant to the construction of the License Agreement, I note that this interpretation carries the advantage of keeping all aspects of the present dispute before one tribunal. The parties agreed that Abbott's claim against Retail Display, not party to the License Agreement, must in any event continue before this court. Having everything decided by one tribunal is more likely to minimize costs”.
Conclusion
The decision emphasizes the important role of the Courts in interpreting contractual agreements in order to ascertain the true intention of the parties. In addition, it reinforces the need to incorporate clear and unambiguous dispute resolution clauses in contractual agreements so as to avoid significant delays and legal costs in determining the right dispute resolution forum.
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